Navigant Research Blog

The pace and impact of change in the utilities industry is unrelenting. Each of the following megatrends is changing the way we produce and use power globally. Together, these megatrends are revolutionizing the industry.

The power of customer choice and changing demands:More customers want to control their electricity usage and spend, as well as when and what type of power they buy. Customers want the ability to self-generate and sell that power back to the grid. Amazon, Apple, Cisco, Google, Honda, Walmart, and many other large energy buyers have increased their focus on sustainable energy solutions. This trend, in turn, is forcing new power purchase agreements with the incumbent utilities in order to minimize their risk of losing significant load. For example, a second (Google was the first) major technology company, Cisco, has confirmed that it is using Duke Energy’s Green Source Rider to provide clean energy for its North Carolina operations.

Rising number of carbon emissions reduction policies and regulations:The impact of COP21 will be significant. Navigant believes that the “hold” on the U.S. Environmental Protection Agency (EPA) is temporary, and state governments and utilities are not waiting. They are taking actions now to be compliant. In fact, sustainability objectives between government, policymakers, utilities, and their customers are much more closely aligned than ever before.

Shifting power-generating sources: U.S. electric-generating facilities expect to add more than 26 GW of utility-scale generating capacity to the power grid during 2016. Most of these additions will come from three resources: solar (9.5 GW), natural gas (8.0 GW), and wind (6.8 GW), which together make up 93% of the expected total additions. Existing assets (coal, but also nuclear) are devaluing and are at risk of becoming stranded as source shifting continues and newer natural gas and renewable generation sources come online.

Delivering shareholder value through mergers and acquisitions (M&A): New industry ventures and M&A are happening at a rapid pace. Exelon’s acquisition of Pepco, Southern Company acquiring SoCoGas, Duke acquiring Piedmont Gas, Emera acquiring TECO, etc. In search for shareholder value through scale and increased synergies, this is a path that utilities will continue to explore.

Regionalizing of energy resources (interstate, north-south, global): In order to provide reliable and affordable power, more energy resources are being regionalized. For example, PacifiCorp and Puget Sound Energy (PSE) and, later this year, NV Energy is joining California ISO. One of the main drivers is to achieve the benefits to manage local differences with regard to renewables, wind, and solar. Another example is Florida Power & Light’s (FPL’s) investment in natural gas exploration and production companies in Oklahoma and gas transmission pipelines to secure fuels for its natural gas combined cycle plants in Florida. Meanwhile, the global availability and movement of natural gas has created an abundance of natural gas. Some of the world’s biggest entrants into the growing global gas market have considered investing in power plants and other big projects now that their multibillion-dollar exporter terminals are about to open, executives said at the Columbia Global Energy Summit on April 27.

Merging industries and new entrants: Several industries, including utilities, oil and gas (O&G), technology, manufacturers, OEMs, etc., are merging around areas like renewables, distributed energy resources (DER), energy management, smarter cities, and transportation. Navigant sees many cross-industry movements, and one of them is increased crossover investments between the electric utility and O&G industries. We see utilities investing in natural gas assets. And we see oil companies making investments in utilities. We also see both making investments in new areas of opportunity, like renewables, DER (distributed generation, energy efficiency, demand response, energy efficiency, etc.), transportation, smart infrastructure and cities, and energy management. That’s why the announcement in April by French supermajor Total is not a surprise to me. Total announced the creation of a Gas, Renewables and Power division, which it said will help drive its ambition to become a top renewables and electricity trading player within 20 years. According to a statement by the supermajor, “Gas, Renewables and Power will spearhead Total’s ambitions in the electricity value chain by expanding in gas midstream and downstream, renewable energies and energy efficiency.”

The emerging Energy Cloud: Old infrastructure is being replaced and geared toward an increasingly decentralized and smarter power grid architecture known as the Energy Cloud. The Energy Cloud is an emerging platform of two-way power flows and intelligent grid architecture expected to ultimately deliver higher quality power. While this shift poses significant risks to incumbent power utilities, it also offers major opportunities in a market that is becoming more open, competitive, and innovative. Fueled by steady increases in DER, this shift will affect policy and regulation, business models, and the way the grid is operated in every single region of the world.

These megatrends cannot be underestimated. They are accelerating transformation in the energy industry, enabling the entry of new players, putting pressure on incumbent players, and altering traditional strategies and business models. Organizations will need to adapt, and there will be winners and losers as this transformation takes shape. My advice to senior leadership of energy companies is to take an integrated, holistic view of the opportunities and challenges that are flowing from these megatrends. Only then will you be able understand the full impacts and path forward. And that is the only way you can really take control of your future.

This post is the first in a series in which I will discuss each of the megatrends and the impacts (“so what?”) in more detail. Stay tuned.

Despite significant media attention, distributed energy resources (DER) are only beginning to make an impact on the grid in certain areas. While DER have the potential to transform the electrical grid and provide significant value to multiple stakeholders, they are not properly understood and valued. This is partially due to the diverse array of technologies included in the DER classification. Solar PV, conventional generators, fuel cells, energy storage systems (ESSs), and load management devices all have distinct operating characteristics as well as costs and benefits. Both utilities and industry regulators are working to address these issues using differing approaches. New York is one of the leading states to tackle this issue through the state government’s Reforming the Energy Vision (REV) initiative.

Costs vs. Benefits

A recent REV program development is helping shape the future of DER in the state. In February, the New York Public Service Commission introduced the Benefit Cost Analysis Order. The order includes a methodology for how electric utilities should evaluate the costs and benefits of proposed grid investments and calculate the net benefits of traditional infrastructure investments compared to portfolios of DER. This is an important development because under the REV initiative, utilities are prohibited from owning DER in most circumstances. The utilities will have to determine where on their systems DER can provide the most value and identify the best way to work with customers and third-party providers to deploy those assets.

A key feature of this order is that the environmental benefits of DER, such as reduced emissions, must be taken into consideration and should help determine the value of DER and compensation paid to system owners. For example, a network of aggregated solar PV plus storage systems can provide the same grid capacity constraint relief as upgrading an existing power plant, only with no added emissions. Although there may be some issues with the proposed valuation methods (such as how to properly compare upfront versus lifetime costs of certain investments), this is certainly a step in the right direction.

Utilities in New York have already been looking into DER alternatives as they are faced with growing populations and rising electricity demand necessitating significant new investments. A notable example of this is Consolidated Edison’s Brooklyn Queens Demand Management Program. The program seeks to defer the construction of a new substation and other investments that would be expected to cost around $1 billion. As an alternative, the utility is making smaller equipment upgrades and investing around $200 million in new demand-side management programs and DER incentives that are expected to reduce grid demand in the area sufficiently to defer the new substation until at least 2024. This includes increased payments for demand response programs and incentives for the installation of distributed ESSs.

Advantages of Flexibility

As a result of this new order, it is likely that utilities may be supportive of and incentivize most flexible DER, particularly ESSs. Unlike other forms of DER, customer-sited ESSs of all sizes can provide a highly reliable form of load reduction for grid operators, as they can be called upon to reduce a customer’s demand without affecting their comfort or operations. Additionally, ESSs provide significant flexibility—when not needed to reduce demand, they can be used to help integrate distributed solar PV and improve reliability for customers. Navigant Research’s recent report, Market Data: Commercial & Industrial Energy Storage, explores the benefits and business models for customer-sited energy storage. While New York’s efforts will help bring clarity to the value and benefits of DER, there remains much uncertainty over the most effective business models to realize the full potential of these technologies.

Microgrids are being developed in mature industrial markets such as the United States to provide premium, high-quality clean power to a broad array of customer segments. Even more dramatic creativity is occurring on the business model front in developing world markets such as India, Africa, and Iraq. Here are three companies moving the needle in terms of technological advances fueling new creative ways to control, finance, and implement microgrids.

SimpliPhi

The first company is SimpliPhi Power, which got its start in 2002 developing off-grid portable power systems for Warner Brothers and Disney film shoots. The company’s portable power units, called LibertyPaks, were used in locations as diverse as the Amazon and New York City. The company then found a home for its technology with the Marine Corps in forward operating bases in Afghanistan and Iraq, relying upon lead-acid batteries and diesel generators optimized to reduce fuel consumption and save lives.

SimpliPhi has significantly upgraded its technology offering over time. The company now focuses on sophisticated power electronics embedded in its smart inverters to integrate distributed solar PV panels with non-toxic lithium ferrous phosphate batteries, which offer a thermal energy profile that does not require cooling and which reportedly outperformed Tesla’s Powerwall in a head-to-head competition. A school in Tanzania shows an example of the company’s typical installations in the developing world. Perhaps SimpliPhi’s most unique business model is its reliance upon an open source, plug-and-play, low-voltage 48-volt direct current (DC) power network, making its microgrids a nice fit with low-voltage grids throughout the developing world. Few other companies focus on such low-voltage microgrids.

SparkMeter

The second company I’d like to reference is SparkMeter, which has a smart meter offering that puts most advanced metering infrastructure (AMI) deployments by U.S. utilities to shame. Lower in cost than the majority of competing metering options and with robust functionality, the combination of hardware and cloud-based interface provides real-time monitoring and adjustments to voltage and frequency issues. SparkMeter offers a platform that that was designed for the off-grid environment, but which can also be deployed in centralized grids. A mobile money or cash-based prepayment system is also integrated into the microgrid platform, allowing vendors to insure cash flows vital to sustainable business ventures in key microgrid markets such as India. The company validates that smart metering is even more important in an off-grid operating environment than in developed economies. Why? In emerging economies, small amounts of electricity are consumed by large numbers of customers with little annual income. It is this kind of technology that is key to making any bottom of the pyramid (BOP) energy access strategy work.

Powerhive

Last, but certainly not least, is Powerhive. With recent investments by the likes of the investment arms of French oil giant Total Energy Ventures and diesel generator manufacturer Caterpillar Ventures, the company has announced plans to develop 100 microgrids serving 90,000 people without electricity. These systems will aggregate up to approximately 1 MW. With plans on the boards for microgrid portfolios that could top 500 MW over the long term, a key to the company’s success has been a pay-as-you-go business model that, like SparkMeter, depends upon mobile phone payment options. Powerhive’s Honeycomb remote monitoring system underpins the pay-as-you go strategy that it first deployed in 2011, which has now emerged as the primary business model for BOP deployments around the world.

All three of these companies highlight the innovation required to create viable sustainable energy projects. How can these lessons be applied to microgrid markets in the developed world?

During the recent SAE 2016 World Congress in Detroit, there was much discussion among attendees and speakers about the future of electric vehicles (EVs). For the most part, there was agreement that a 200-mile nominal range on a charge will be the minimum needed to get mainstream customers to start accepting EVs as a viable transportation alternative. One notable exception to that opinion, at least publicly, came from Kevin Layden, Ford director of electrification engineering, who told Automotive News that a 100-mile range provided a better balance of weight and cost while meeting the needs of most drivers.

Not coincidentally, this fall, Ford is slated to release an upgraded version of its sole battery electric vehicle (BEV), the Focus Electric, with that same 100-mile range. There is little reason to doubt that Ford has no immediate plans to directly challenge the Chevrolet Bolt (which is set to launch at nearly the same time as the refreshed Focus) or the upcoming Tesla Model 3.

Late BEV Addition

The current Focus debuted in 2011 and the BEV variant was a late addition to program. In fact, it wasn’t even originally conceived by Ford. Engineers at supplier Magna International built a pair of prototypes in 2008 to demonstrate their EV engineering capabilities and Ford adopted the program late in the year as part of its recovery plan following the financial meltdown. The next-generation Focus was already well in development by that time, but Ford worked with Magna to adapt the electric drive system and battery packaging to the new model. The packaging results were less than optimal, with severely compromised cargo space compared to the competitors such as the Nissan LEAF or the later Volkswagen e-Golf.

While advances in battery technology in the years since have enabled Ford to boost the original 76-mile range to 100 miles, packing in twice as much capacity into this generation of the Focus would simply be impossible. Given that like other large automakers, Ford still needs to sell a certain number of plug-in vehicles (PEVs) every year in order to meet the California Zero Emission Vehicle (ZEV) mandates, and it’s no surprise that the priority right now is to sell the upgraded Focus Electric as is. Given the new competition from the Bolt, Ford will likely emphasize the starting price before incentives of $29,170 for the Focus, some $10,000 less than its original price in 2012.

More Models on the Way

While Ford marketing tries to sell the current-generation Focus Electric for the next 2 to 3 years, the product development team is no doubt working overtime to match or beat the benchmarks set by Chevrolet and Tesla for the next-generation model. In December 2015, Ford announced a $4.5 billion investment to launch 13 new electrified models by 2020 and the chances are excellent that at least one of those will be a 200-mile BEV that can sell for $30,000. The next-generation Focus platform is expected to debut in 2018 and Ford will likely have made allowances in the design to package larger batteries to meet the market demand for EV capability. During the 1Q 2016 financial results call on April 28, Ford CEO Mark Fields commented that the company wants to be in a leadership position on EVs, implying that Ford intends to build longer-range models in the coming years.

Navigant Research’s Electric Vehicle Market Forecast report projects global light duty BEV sales of almost 1.6 million in 2024, with nearly 462,000 in the United States. If manufacturers are to meet their individual sales targets under the California EV mandates, they will have to create products that are meet increasing customer expectations. With multiple manufacturers openly committing to affordable BEVs with 200 miles or more of range, only very inexpensive vehicles are likely to be deemed acceptable with less.